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Issue #1530      7 December 2011

Mini budget

Maxi attack

It might be called a mini budget, but there will be nothing mini about its impact. The cuts are aimed at the public sector, workers and families and foreshadow even deeper cuts to come in future budgets. Economically, the cuts are unnecessary and irresponsible. There is a pressing need for an expansionary budget to stimulate the economy. The government’s obsession with a budget surplus has overridden commonsense and will only serve to contract an economy not fully recovered from the global financial crisis and heading towards recession.

Treasurer Wayne Swan.

Treasurer Wayne Swan’s Mid-Year Fiscal and Economic Outlook (MYFEO) statement is built on quicksand. For Australia, Swan forecasts “solid economic growth, low debt and a return to surplus in 2012-13, despite a significant deterioration in global conditions in recent months cutting $20 billion from government revenues.” (The $20 billion is over four years, around $5 billion this year.)

At the same time, he notes, “Global economic and financial conditions have deteriorated markedly in recent months, exacerbating some of the existing stresses on parts of the Australian economy. These developments have been transmitted through a number of channels, with considerable volatility in the exchange rate, falls in Australian equity prices, significant falls in prices of some of Australia’s key export commodities – particularly iron ore and coal – and weaker business and consumer confidence. This has contributed to a reduction in momentum in some parts of the economy and a slowdown in employment growth.”

Swan continued, “The substantial downgrades to budget revenue flowing from heightened global turbulence have meant that the government has had to find further savings in the budget,” suggesting global developments are already taking their toll on Australia’s economy. Actually, some of the decline in government revenue is due to government policy – ongoing cuts to the public sector, privatisation, tax reductions for the corporate sector, failure to support the manufacturing sector. Every job lost means less income tax revenue.

Despite his recognition of the “considerable risks” facing the Australian economy, Swan’s forecasts are at the extreme end of optimism, possibly to try to instil investor confidence.

“The emerging market economies are expected to contribute over three quarters of total global growth over the next two years,” says Swan who is relying on China and India to sustain Australia’s present exponential growth in mining exports and capital investment in the industry.

Manufacturing, retail, housing construction and tourism remain depressed, and continue to shed labour. The distortion in Australia’s economy and over reliance on mining exports has reached the point where next year capital investment in the mining sector is set to exceed total capital investment in the rest of the economy! It has plans to invest $82 billion in 2012-13, and according to the treasurer there is a total of $400 billion in the capital investment pipeline. Yet the mining sector directly employs around two percent of the workforce, with two or three times that as flow-on.

Contractionary policy

According to the treasurer there will be a budget deficit of $37.1 billion in 2011-12 and a surplus of $1.5 billion in the following year (2012-13) – a swing of $38.6 billion! Swan warns that unemployment is set to rise and wages growth will be suppressed causing further shortfalls in income tax revenue. So how can such a dramatic turnaround be achieved in only 12 months?

There are the budget cuts. Public sector “efficiency dividend” cuts will be increased from the usual 1.5 percent to 4 percent for one year (saving $1.4 billion), resulting in 3,000 more job losses according to the Community and Public Sector Union. There is a reduction in the baby bonus, some family tax benefits will be conditional on immunisation. The government will reduce its co-contribution on superannuation payments to low and middle income workers. Some other tax measures have been deferred.

But these only add up to a few billion, hardly worth the loss of services and pain they will cause. So where is the rest of the $38.6 billion turnaround to come from?

Smoke and mirrors

A large component of the hoped-for 2012-13 budget surplus is being artificially created.

The government is bringing forward payments from the surplus year 2012-13 to this year – not worrying how big the 2011-12 deficit gets. These include $4.3 billion for infrastructure projects, household assistance under the Clean Energy Future package and Queensland flood reconstruction. Some 2012-13 payments are being deferred for a year.

These financial manipulations will not have any impact on the overall economy. They are political. The government wants to be able to boast to the electorate (in an election year) and to the financial markets and ratings agencies that Australia is the first major advanced economy to return its budget to surplus following the global financial crisis. A model of “responsible economic management” from “the world’s best treasurer”!

As the global turbulence increases, Europe goes into recession, as predicted by Swan, as the fall-out hits China’s and Australia’s shores, Swan will be back with more spin about revenue shortfalls and the need “to find further savings in the budget.”

The mini budget will add to existing measures and pressures that are reducing the purchasing power of people. If the economy is to grow, people need more money in their pockets, not less. The government is fast tracking an economic crisis.

Expansionary measures required

Apart from its short-term political goal, the budget surplus fetish serves as an excuse for the government to carry out further cuts to the public sector, to further wind back social security, and continue with its privatisation of education, health and other services. It is the same austerity program that the people of Europe are being subjected to. It has been a central feature of government budgets for several decades. In Australia the process has been gradual, small increments at a time, rousing relatively little opposition from the labour movement. What we are seeing in Europe is a “Big Bang” model, one that we could expect from an Abbott Coalition government.

Several state governments have already gone on the offensive slashing real wages of public servants and cutting services.

There is nothing wrong with a budget deficit or government debt. The key questions are what they serve and whether they are manageable. The artificially bloated deficit for 2011-12 is only 2.5 percent of GDP. Australia’s net debt is about to peak at 8.9 percent of GDP. These figures are low by any standards, There is absolutely NO sound economic rationale for budgetary cuts.

But, with the economy heading into recession, there is a pressing need to introduce expansionary measures NOW. It makes economic sense. It is responsible economic management to boost funding for aged care, public housing, job creation in the manufacturing sector, development of renewable energy, increasing public hospital beds, employing more teachers in state schools, expand the public sector and increase pensions and other welfare payments.

There so many unmet needs that should receive additional funding. These would create jobs, increase purchasing power, improve living standards and be of overall economic benefit countering the recessionary direction of the economy.

In addition, revenue can be raised by such means as increasing company taxation, a genuine super profits tax on all sectors of the economy, slashing the $80 million a day military budget and phasing out the $4 billion plus private health insurance rebate.

Such policy changes can only be achieved by the organised working class, in alliance with wider community organisations, in struggle and through the building of an alternative political force that puts people’s interests first.  

Next article – Editorial – Not so super mining tax

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